Retirees at center of San Bernardino-vs.-CalPERS bankruptcy battle

Related story: John Weeks: CalPERS might enjoy a tour of SB
After months of trading increasingly sharp legal filings, a pitched battle between San Bernardino and the nation's largest pension system will take place in bankruptcy court on Friday - with each warning that the other's victory could mean defeat for the little guy all across the state.

Since filing for bankruptcy Aug. 1, the city has stopped paying its share of required payments to the California Public Employee Retirement System and anticipates deferring those payments until the end of fiscal year 2013 - by which time CalPERS calculates it will owe up to $19 million.

But for CalPERS to give that money as an "involuntary loan" could threaten the soundness of the fund, violating its constitutional duty to protect retirees statewide, said Chief Executive Officer Ann Stausboll.

"The system has to be sound so we can pay the benefits," Stausboll said. "These people have worked their entire lives, choosing a career in public service. They made life decisions based on that. ...

"No one else is standing up for employees."

That's the sentiment behind a high-octane push to have bankruptcy Judge Meredith Jury lift a stay that otherwise prevents anyone from suing a city while it's in bankruptcy court, so CalPERS can ask state courts to force the city to make those payments.

That wouldn't leave money for essential city functions - or workers to help, city officials say.

"Of course, their version of it would completely annihilate the city, leaving our workers with no jobs," said Jim Morris, chief of staff and son of San Bernardino Mayor Pat Morris. "The fact is they're asking for a payment we can't make. And so if that's the case, the only way to make it is if we have massive layoffs.

Bankruptcy timeline

Aug. 1: The city of San Bernardino files for Chapter 9 bankruptcy protection.

Nov. 26: The San Bernardino City Council approves a pendency plan - a plan for the city's finances as it moves through bankruptcy protection. The plan includes a measure to defer payments to CalPERS, the state's largest pension system.

Oct. 24: CalPERS and other creditors file papers in bankruptcy court arguing that San Bernardino is not eligible for bankruptcy. CalPERS - the city's largest creditor - argues primarily that the city has not provided enough information to prove that it is insolvent and that the city can come up with a plan to adjust its debts.

Dec. 14: CalPERS files court papers denouncing San Bernardino's bankruptcy petition as a `sham' and accuses the city of "criminal behavior" in withholding payments to the pension plan.

Dec. 17: San Bernardino City Attorney James Penman speaks at a City Council meeting, strongly rejecting CalPERS' `sham' comment, adding that "we think we have a very strong case."

Dec. 21: Bankruptcy court is set to hear arguments by CalPERS and San Bernardino over the city's plan to defer state pension payments.

San Bernardino's pendency plan - its budget during bankruptcy or until the end of fiscal year 2013-14 - cut $26million as it sought cuts of 30percent to most city departments, but also puts off nearly $35million in payments.

"It's going to come back to them 100 cents on the dollar, plus interest," Morris said. "If they're concerned about the workers, then we really should be working together."

Meetings between CalPERS and city officials have continued as the legal battle rages, and Stausboll said some compromise is possible.

"We want to be flexible," she said, and when pressed said it was "conceivable" some plan involving deferred payments could be worked out.

CalPERS does offer - and other cities have used - hardship plans, but much of that depends on reamortizing the payments, meaning they're made over a longer period of time. For the most part, San Bernardino is amortized for as long a period as is allowed - 30 years - according to David Lamourex, deputy chief actuary for CalPERS.

Meanwhile, both sides accuse the other of exaggerating the damage they would suffer, and both have enlisted allies to the fight.

A group of pension obligation bondholders - the city's next-largest group of creditors, after CalPERS, who themselves face deferred payments of $3.4million under the city's plan - hired an outside actuary, Joseph Esuchanko, who declared to the court that San Bernardino's deferred payments wouldn't hurt the statewide system.

CalPERS notes that state laws make it the only one responsible for determining whether its system is sound and add that it's impossible to determine what the effect of stopped payments will be because the city's official plan doesn't say when repayment will begin or what, if any, interest will be offered.

And it attacks the financial picture painted by the city as unreliable.

Thousands of pages of documents they've asked for haven't been produced, and financial records appear to be in shambles, said CalPERS attorney Michael E. Lubic.

In court documents, the city says enough relevant information has been produced and criticizes CalPERS for "a harangue replete with misstatements respecting the city's production of documents."

City Attorney James F. Penman said Thursday there's enough information to see the basics: There isn't enough money.

"I don't know without seeing the documents precisely what they would show, but I think it's pretty clear that we don't have money to provide essential city services and pay all of our creditors - including PERS, our largest creditor - at the same time," Penman said. "That's the purpose of bankruptcy, that's why there's a Chapter 9, is so you can work through these issues."

Lubic said the purpose of bankruptcy is to adjust debts from before bankruptcy - not to allow a city to keep collecting services without payment afterward.

To that, the city responds that deferring payments is "routine" for municipal bankruptcies, of which there have been few, because otherwise operating during bankruptcy proceedings would be impossible.

As for the documents CalPERS - along with the mid-manager employee union, the only other group besides CalPERS to argue San Bernardino isn't eligible for bankruptcy - it would be great to have them, Morris said.

"We made drastic cuts in order to basically become cash-flow solvent and to make payroll, and we've had other (people leave voluntarily)," he said. "We are down to 13 people in our Finance Department."

Other cities close to San Bernardino's size - 210,000 - usually have 25 to 30 finance workers, Morris said, even for routine business.

What the city does produce is being eagerly watched by observers throughout the state and nation, because it may set bankruptcy precedent and because of the role pensions play.

"You can't overemphasize that, look, the biggest problem: San Bernardino is not unique in being crushed by its pension obligations, in large part because CalPERS is under-performing and San Bernardino offered very healthy pension offers," said bankruptcy lawyer Michael Sweet of Fox Rothschild in San Francisco.

Mayor Pat Morris has also blamed pensions for much of San Bernardino's problem, and Calpers acknowledges it's part of a vibrant debate.

"There are discussions to be had about whether benefit levels have been appropriate," Calpers spokesman Robert Udall Glazier said. "But that's another discussion."

In Pomona, Deputy City Manager Mark Gluba said the City Council has cut extensively because not paying CalPERS isn't an option, regardless of how the San Bernardino case goes.

"We've gotten a lot of these speculation calls - `are we next?' ... but we've made a lot of adjustments," Gluba said. "All I can comment from Pomona's perspective is we're paying those obligations, and I don't want to speculate as to what CalPERS situation would be if San Bernardino did or didn't pay."

Most participants and observers hesitantly predicted Judge Jury would hear arguments and give some guidance Friday, but delay a decision for later.

It will still be big, they said.

"As I said, you can't overemphasize how big a deal this is," Sweet said. "It's a pretty wonky concept - this is not something people think about every day - but the implications will be extraordinary for current workforces and cities going forward."